Treasury Laws Amendment (Putting Consumers First-Establishment of the Australian Financial Complaints Authority) Bill 2017

Second Reading Speech

Senator McGRATH (Queensland-Assistant Minister to the Prime Minister)

I move:

That this bill be now read a second time.

This bill amends the Corporations Act 2001 and other related legislation to radically overhaul the financial system dispute resolution framework by establishing a new one-stop-shop dispute resolution body - the Australian Financial Complaints Authority - to ensure that consumers and small businesses have access to free, fast and binding dispute resolution.

The bill forms part of the Government' s broader commitment to ensuring that the banks and other financial institutions are held to account when they fail to meet community expectations.

The financial sector plays a vital role in the Australian economy by meeting the needs of its users, including consumers and small businesses.

Its role in the economy and the lives of all Australians continues to grow and evolve.

Given the crucial role of the financial sector, Australians expect high standards from financial institutions.

Where these expectations are not met and consumers wrongfully suffer a loss, it is critical that those who have been wronged have access to redress in a timely manner.

External dispute resolution (EDR) plays a critical role in providing consumers and small businesses with access to an alternative, out-of-court, dispute resolution service, to hear and determine their complaints about financial firms.

The Government is committed to having a world class financial dispute resolution system.

That is why in April 2016 the Government commissioned an independent comprehensive review of the dispute resolution framework (the Ramsay Review), which was led by an expert panel comprising Professor Ian Ramsay, Julie Abramson and Alan Kirkland.

The Ramsay Review undertook a rigorous consultation process and received 187 submissions in response to its Issues Paper and Interim Report.

The Ramsay Review found that the current dispute resolution framework is a product of history rather than design and, in significant areas, reform is needed.

The Review made eleven recommendations to strengthen and future-proof the dispute resolution framework, all of which the Government has accepted.

The Review' s central recommendation was to establish a new one-stop-shop dispute resolution body for all financial disputes, including superannuation disputes.

In line with this recommendation, the Government committed to establishing the Australian Financial Complaints Authority, or AFCA, which will be based on an industry ombudsman model, with additional statutory powers where required.

This approach combines the strengths of both a statutory tribunal and an industry ombudsman scheme.

AFCA will replace the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal (SCT), and will reduce the unnecessary duplication and consumer confusion that has been characteristic of the current framework.

This simplification of the system has been welcomed by Gerard Brody, CEO of Consumer Action Law Centre who has commented that "Currently if you have a problem with a bank or finance provider, it is incredibly confusing to fix the problem. The people who call our services just want to get their lives back on track - the Government can help them by simplifying the system and giving it teeth."

Choice likewise welcomed the announcement of AFCA, stating "it will provide consumers with a single, accessible complaints resolution service when something goes wrong".

AFCA will have higher monetary limits and compensation caps than those of FOS and CIO, and will maintain the SCT' s unlimited monetary jurisdiction for superannuation complaints. The new monetary limits and compensation caps are double and, in the case of small business credit facility disputes, almost triple the limits and caps currently in place. This will significantly improve access to justice for consumers and small businesses.

The creation of AFCA will also address recommendations of the House of Representatives Standing Committee on Economics' Review of the four major banks (also known as the Coleman Report) and the Carnell Inquiry into small business loans.

The Coleman Report recommended that the Government replace the three existing EDR schemes with a ' one stop' Banking and Financial Services Tribunal. The report noted that it would: reduce confusion for consumers; enhance small businesses' EDR scheme coverage; help ensure consistent outcomes for complainants; and eliminate unnecessary duplication. The AFCA will fulfil all of these requirements.

The Carnell Report likewise recommended the establishment of an industry funded external dispute resolution one-stop-shop with appropriate small business expertise to hear disputes relating to credit facilities of up to $5 million. The AFCA will meet this recommendation by significantly expanding small business access to redress, through monetary limits and compensation caps that are almost triple the existing limits and caps.

Small Business has welcomed the establishment of AFCA. Peter Strong, CEO of the Council of Small Business Australia (COSBOA) commented that "too often, small business owners are shafted by the actions of big banks and these business owners have little option but to take their medicine in the face of the overwhelming power of the big banks. But this new Authority will provide business owners with a clear mechanism to seek redress where they have been unfairly done by".

The bill introduces a new legislative framework which sets out the standards that AFCA must adhere to.

Under the legislative framework, AFCA will be accessible to consumers and small businesses, who will be able to have their disputes with financial firms heard and determined by AFCA for free.

All financial firms, including superannuation funds, will be required by law to be members of AFCA.

AFCA will be a not-for-profit company governed by a board comprised of an independent chair and equal numbers of directors with industry and consumer backgrounds. It will be funded by industry.

The legislation will ensure that AFCA will provide fair, efficient, timely and independent dispute resolution services and that it has the relevant expertise to resolve the disputes it hears.

The legislation also includes a number of statutory provisions to ensure that AFCA has the necessary powers to effectively resolve superannuation disputes. Additional statutory provisions are required because of the complex nature of some superannuation disputes that involve third parties, such as death benefit disputes.

AFCA will have the power to join third parties to a dispute, require parties to attend conciliation and require the production of documents.

The statutory provisions available to AFCA will allow timely decisions to be made, to enable prompt payment of death benefit amounts by superannuation funds, to those who may be in need.

The framework does not dictate the way in which AFCA should deal with complaints. This will enable AFCA to adapt to change and to be flexible and innovative in its approach to resolving disputes.

To ensure that AFCA meets community expectations for free, fast and binding dispute resolution, it will be subject to a comprehensive accountability regime.

First, the AFCA scheme will be authorised by the Government. The responsible Minister will not authorise the AFCA scheme unless satisfied that it has robust systems and processes to meet community expectations and the rigorous standards set out in the legislation. And where the scheme, once authorised, fails to meet these standards, the Minister will have the ability to revoke authorisation.

In addition, the responsible Minister will have the ability to impose conditions on authorisation. This ability to set conditions will allow the Government to ensure that AFCA is accountable to both consumers and member firms, for example, through specifying the frequency of independent reviews of the scheme' s operations and procedures or requiring AFCA to report and provide reasons to the Government on an annual basis in respect of any changes AFCA makes to its membership fees.

The ability to set conditions will ensure that AFCA is appropriately transparent, for example, by ensuring that any recommendations for improvement that are made as part of an independent review of AFCA be made publicly available.

The AFCA board will be comprised of an independent chair and equal numbers of directors with consumer and industry backgrounds. At the establishment of AFCA the responsible Minister will make a one-time appointment of the minority of AFCA' s board, including the independent chair, to ensure that it has an appropriate mix of skills and experience.

The Australian Securities and Investments Commission, or ASIC, will be responsible for ensuring that the AFCA meets the standards set out in the legislation on an ongoing basis.

To fulfil this role, the bill provides ASIC with the ability to set regulatory requirements that AFCA must adhere to and also provides ASIC with a general directions power to compel AFCA to comply with the standards set out in the legislation.

The enhanced accountability that AFCA will be subject to under the new regime represents a significant improvement over the existing regime, under which ASIC had limited powers to require dispute resolution bodies to improve their practices. The bill also introduces a new internal dispute resolution reporting regime.

Internal dispute resolution is a financial firm' s internal dispute resolution process that involves the firm' s initial response to a complaint. An effective internal dispute resolution process plays an important role in enabling financial firms to quickly resolve genuine complaints, without an EDR or court process.

To provide firms with an incentive to have best practice internal dispute resolution procedures, the Government is implementing a new internal dispute resolution reporting regime.

Under the new regime, ASIC will be empowered to create a legislative instrument that will determine the internal dispute resolution data that financial firms will need to report to the regulator. ASIC will then have the ability to publish this data at both the aggregate and firm level.

Publishing internal dispute resolution data will drive financial firms to improve their internal dispute resolution practices, by providing industry benchmarks on how long it takes to resolve disputes and highlighting poor performing firms.

Given the significance of these reforms, the Government understands the importance of having a smooth transition from the existing dispute resolution bodies to AFCA.

That is why the Government has created a transition team, led by Dr Malcolm Edey, a former Assistant Governor of the Reserve Bank, to drive the establishment of the AFCA.

Recognising the importance of seeking consumer and small business feedback on AFCA, as well as drawing on the expertise of the three existing dispute resolution bodies, Dr Edey has established a representative expert reference panel to assist his transition team.

The transition team will advise the Government on AFCA' s terms of reference, governance and funding arrangements. It will also make recommendations on the transitional arrangements required to appropriately resolve legacy disputes of the three existing schemes.

Following feedback from the Treasury consultation paper on the proposed competitive selection process for authorisation of AFCA, the Government understands such a process was not considered by a number of industry or consumer stakeholders to be the best way to deliver AFCA. A competitive selection process will not therefore be pursued. The bill also provides for the winding down of the SCT, which will cease to accept new complaints once AFCA commences operations. It will continue to work through its backlog of disputes until 1 July 2020.

The new EDR regime will result in significant benefits for consumers and small businesses, with less confusion, increased access to redress and greater accountability for financial firms.

As the Consumer Action Law Centre stated "Australians need one, high quality service to resolve their disputes against financial institutions quickly and fairly. The one-stop-shop announced today is a sensible move that can help Australians get justice".

This bill achieves this outcome and ensures Australian consumers and small businesses get free, fast and binding access to redress and compensation.

Full details of the measure are contained in the explanatory memorandum.

Ordered that further consideration of the second reading of this bill be adjourned to the first sitting day of the next period of sittings, in accordance with standing order 111.